Choose wisely: Crowdfunding through the stages of the startup life cycle
Section snippets
Startups and crowdfunding
Startups require resources to succeed and one of the most important resources is money. Traditionally, the options for capital formation available to startups were few and comprised primarily of FFF (friends, family, fools), angel investors, venture capitalists, and seed funding (Startup Explore, 2014). More recently, there has been a surge in alternative models. Among these, crowdfunding has emerged as a popular source of capital formation in various fields—from purely for-profit to social
Types of crowdfunding
Crowdfunding as an online distributed funding model suggests that requesting relatively small monetary contributions from a crowd helps startups acquire critical financial resources. In this context, crowdfunding is viewed as a homogenous concept: a general request for money via an open call. However, just as the funding needs for startups vary, crowdfunding varies by the type of rewards offered to supporters. The following section outlines a typology of crowdfunding (see Table 1) by
Benefits of crowdfunding for startups
The previous section introduced a typology of crowdfunding that considers the type of return or reward to backers. While this is an important first aspect to understand, a startup also needs to consider the specific benefits it aims to achieve in pursuing crowdfunding efforts. First, crowdfunding helps alleviate the capital crunch many startups face. Many campaigns aim to raise a relatively small sum of money for a one-time project or event (Mollick & Kuppuswamy, 2016). Other projects intend to
Selecting the best crowdfunding type for each stage
As previously laid out, crowdfunding provides monetary and non-financial resources. However, in the prevailing view, a startup is often viewed as a single construct: an individual aiming to turn an idea into a viable business that requires resources. The challenge with this view is that it ignores the life cycle a startup undergoes, where each life cycle stage has unique monetary and nonmonetary resource needs. The following section addresses this challenge and suggests that a startup can
Best practices on how to attract a crowd and its contributions
As laid out in the previous section, startups are able to identify the most suitable crowdfunding type by considering their specific life cycle stage and resource requirements. Once the choice of crowdfunding type is made, campaign proponents face the next challenge, which is how to attract people and their contributions. Crowdfunding is a transactional relationship between founder and funder. The information asymmetry between these two parties makes this relationship imbalanced and
Final thoughts on crowdfunding for startups
This article offers contributions to both the practitioner and research communities. For startups, it demonstrates that crowdfunding can generate a valuable organizational resource base, primarily through the acquisition of funds, but also through nonmonetary resources in the form of learning, the formation of crowd capital, and marketing (Brown et al., 2017, McCarthy et al., 2013, Prpić et al., 2015). But not all crowdfunding types are equally suited to support the various resource
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